Valuing technology investments: use real options thinking but forget real options valuation

International Journal of Technoentrepreneurship

Volumn 1, Issue 1, 2007, Pages 58-77

  Steffens, Paul R ^a   Douglas, Evan J ^a  

^a QUEENSLAND UNIVERSITY OF TECHNOLOGY   (Australia)

Author keywords

Decision Tree Analysis (DTA); real options; technology investments; valuation

Indexed keywords

EID: 65749096486     PISSN: 17465370     EISSN: 17465389     Source Type: Journal    
DOI: 10.1504/IJTE.2007.013270     Document Type: Article

References (54)

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51. We treat the terms risk and uncertainty interchangeably in this paper. We acknowledge the differences between known and knowable risks and unknowable uncertainty traced to the pioneering work of Knight (1921). In our context we consider only risks that can be assessed either objectively or subjectively (through management judgement), referred to as decision making under uncertainty in the decision sciences tradition (Raiffa, 1968).
52. It is assumed that firm-specific risk can be fully hedged by the investor.
53. One rationale that might be utilised is to estimate the probability of failure (Pf) from experience with ventures that are similar in most or many respects to the one under consideration. If Pf = 33.3%, for example, the probability of success (Ps) is 66.7%. Accordingly the risk premium is calculated as Pf/Ps = 50%, since the successful firms are expected to repay the investor for the (lost) investment in the failed enterprises. This risk premium is added to the risk-free rate to arrive at the opportunity discount rate.
54. This is a specific application of the Expected NPV technique.